Editorial comment

According to the Mayo Clinic, hoarding disorder – or compulsive hoarding – is “a persistent difficulty discarding or parting with possessions” which results in the “excessive accumulation of items, regardless of actual value.” On this basis, there is an argument for diagnosing the dry bulk shipping sector with this disorder.

Looking at the demand side, the dry bulk shipping sector should be having a good year. According to shipping association, BIMCO, Chinese seaborne iron ore imports are up 9.6% in 1H16 compared to 1H15; seaborne coal volumes are up 5%. Beyond China, Argentina’s grain exports are up 42.1% in 1H16.

Yet freight rates remain at record lows: an indication that something is “very wrong in the dry bulk market,” Peter Sand, Chief Shipping Analyst at BIMCO, wrote in a research note recently.

The cause of that wrongness is hardly a secret. Despite the low freight rates, capacity in the dry bulk market continues to grow. According to BIMCO, 31 million DWT of new capacity has entered the market since the beginning of the year, while only 23 million DWT has been sent for demolition. As a result, market capacity will increase 1.1% this year.

Freight rates are now so low that they only cover the day-to-day operational expenses of dry bulk carriers, making no contribution to covering shipping company’s overheads or financing costs. On this basis, BIMCO expects the industry to be loss making this year.

Compare this to the fortunes of the coal sector, where prices have enjoyed a renaissance in 2016. Here, unsentimentally brutal supply cuts over the past few years have laid the foundation for price rises when demand – particularly import demand from China – turned. Metallurgical coal is the best performing commodity this year: prices are up 80% this year with spot prices touching US$200/t recently.

It is time then that the dry bulk industry ‘de-cluttered’. As Sand notes: “The dry bulk industry is faced with the lowest earnings ever with overcapacity the main problem and demolition the silver bullet. Difficult as it is to part with your ship, it is what the industry needs most.”

Although the average age of the fleet is now pretty low (meaning the low hanging fruit – the older ships – have already been dealt with when it comes to demolition), the market cannot hope to rebalance unless demolition activity steps up. This is particularly so given the unpredictable nature of current dry bulk commodity demand trends.

China remains the driver of the recent demand spikes in dry bulk commodities – but the exact workings of this most critical of countries remains opaque and difficult to read. Take this statement on Chinese demand for imported coal from a recent analysis by Macquarie: “With domestic production down […] imports have had to rise to fill the supply gap. Since this essentially represents the abandonment of a two-year programme to reduce imports since 2014, few envisaged this happening.”

Macquarie continued: “beyond this year [there] is a lot of uncertainty over how Chinese policy plays out”. Dealing with this uncertainty will be a key challenge for the dry bulk sector. It would be made easier if it could get its house in order soon.